Journal of Social Science Education © JSSE 2010 Volume 9, Number 1, 2010, pp. 20–31 ISSN 1618-5293

Christoph Deutschmann Paradoxes of Social Rise. The Expansion of Middle Classes and the Financial Crisis1

The article views the current financial crisis from the background of long term socio-economic changes in ad- vanced industrial societies. Central points are the rise of middle classes, the accumulation of financial wealth in the upper strata of middle classes in combination with an increasing concentration of financial assets at the level of the top rich, and the advance of pension and investment funds as collective actors at financial markets. The paper analyses the interconnections between these developments in the framework of a multilevel model, culminating in the thesis of a collective “Buddenbrooks”-effect: a structural upward mobility of society will lead to an increasing imbalance at capital markets because a strongly rising volume of financial assets searching profitable investment opportunities will go parallel with a decline of the social reservoir of solvent entrepre- neurial debtors. Therefore, advanced industrial economies are faced with chronic excess liquidity and export surpluses at capital markets, leading to the build-up of speculative bubbles and subsequent crashes. The author argues that the present crisis cannot be understood properly without taking account of these backgrounds.

I. Introduction1 tors” in such a neat way – in a system actually made At the end of 2009, the financial crisis was still far up of human actions? Would a realistic theory of fi- from over and the discussion on the causes of the cri- nancial markets not have to take into account how sis continues. There is still much confusion about how the actors really are and not how they should be from all of this could happen. Apparently, the expertise of the viewpoint of theory? And is it suffice to explain professional economics had largely failed, as the large the persistence of low interest rates after 2001 (and majority of economists were unable to forecast the likewise today) simply by “monetary excesses” by the crisis and its dimension. The mainstream theory of Fed and other central banks, instead of considering “efficient financial markets” had even ruled out the the global excess liquidity on capital markets?2 possibility of such a collapse. Nevertheless, the pres- Compared with this orthodox common sense view, ent discussion on the explanation of the crisis is still the heterodox positions surely are more realistic. Two being dominated largely by the economic profession. well-known heterodox approaches are Minsky’s “fi- In a broad overview, two lines of arguments can be nancial instability” concept (Minsky 1982) and Kindle- distinguished: orthodox and heterodox. berger’s and Aliber’s (2005) historical analysis of ma- The orthodox position could perhaps be sum- nias, panics and crashes which is closely related to marised by the keyword “human failure”. This posi- Minsky’s work. According to these authors, financial tion attributes the main responsibility for the collapse crises are normal phenomena of capitalist develop- of the international financial and capital markets to ment. In their historical overview covering the period the actors, their “greed”, irresponsibility and incred- between 1618 and 1998, they count no less than 38 ible carelessness. Mortgage credits had been granted such crises. Financial markets are different from other at a large scale to debtors with no sufficient ability to markets, as they are characterised by several particu- pay. With the support of analysts and rating agencies, lar mechanisms: these credits were securitised and sold on the global a.) On financial markets there is no built-in equilib- market. Investment bank managers, driven by the rium mechanism. Rather, positive or negative disequi- prospect of astronomical bonuses, created and mar- libria tend to reinforce themselves. A phase of “mania” keted an ever increasing variety of largely intranspar- may develop, if an exogenous incident gives rise to an ent financial “products”,. Further players in the game optimistic mood among investors, inducing them to were the central bank authorities, who, for too long, buy assets. As a consequence, the prices of the assets kept up their policies of cheap money after the last will rise, thereby motivating other investors to jump crash in 2000/2001 and thus helped to create a new on board. The rise of prices will accelerate if some in- bubble (Taylor 2009). According to this widespread vestors start to finance their purchases through credit, view, the problem does not lie in the system, but in expecting that the increase of prices will exceed the the actors. If everybody had stuck to the rules, the interest rates which they have to pay. At some point, collapse would not have happened. However, is it re- ally possible to distinguish the “system” and the “ac- 2 Taylor (2009, 6) rejects the excess liquidity thesis by pointing to IMF figures on the development of global saving and invest- 1 A German version of this paper appeared under the title: “Die ment shares, showing a decline of the global saving rate. As Finanzmärkte und die Mittelschichten: der kollektive Budden- empirical evidence this is clearly too thin (see the discussion of brooks-Effekt” in: Leviathan 2008, Vol. 36/4: 501-517 the development of financial assets below). 20 Christoph Deutschmann Journal of Social Science Education Paradoxes of social rise – The expansion of middle classes and the financial crisis Volume 9, Number 1, 2010, pp. 20–31

however, the optimistic mood will decline, and some of rent seeking financial assets on the one hand, and investors will start to sell their assets in order to re- declining real investment opportunities on the other. duce their liabilities. The upward movement of the After the burst of the New Economy bubble in 2001- market comes to a halt and turns in the opposite di- 2003, this mismatch now seems to have manifested rection, again reinforcing itself. The leverage effect of itself again at a much larger scale. credit further accelerates the negative trend. Prices My aim is thus to look beyond the concrete mecha- decline and bankruptcies increase, the crisis is fol- nisms of the actual crash and to analyse the long-term lowed by panic and crash. In short, financial markets shifts of social class structures and financial asset dis- are inherently instable. tribution underlying the crisis. In the next section b.) The build-up and subsequent annihilation of (II.) I will consider these trends in more detail. In the assets in financial crises is often connected with con- following section (III.) I will outline a macro-micro siderable redistribution effects between the investors. model of financial markets in order to clarify the in- On the winning side we find the professional specu- teractions between shifts in the social class structure lators, the “insiders” who manage to buy and sell in and the distribution of financial assets on the one time, although they can, of course, fail, too. The losers hand, and individual investor behaviour on the other. are the amateurs, the outsiders, who buy and sell late: A rigorous empirical test of the model is not intended “The outsider amateurs who buy high and sell low are here. Nevertheless, I will try to demonstrate the plau- the victims of the euphoria that affects them late in sibility of the approach by using empirical data, refer- the day. After they lose, they go back to their normal ring mainly to the German case. A concluding discus- occupations to save for another splurge five or ten sion will follow (IV.). years later” (Kindleberger, Aliber 2005, 40). c.) A third peculiarity of financial markets is the in- II. Long-term structural changes ability of actors to learn. Of course, everybody knows Since the end of the Second World War, the mature in- that crises can happen and, to be more precise, that dustrial societies of Europe, North America and Japan they did happen in the past. However, during the experienced a period of lasting economic prosperity. build-up of a new mania the conviction prevails that At least during the first three decades after the War, this time everything is different: “The authorities rec- the level of real mass income rose considerably, the ognize that something exceptional is happening in middle classes grew in relation to absolutely and rela- the economy and while they are mindful of earlier ma- tively decreasing manual workers. The service sector nias, ‘this time is different’, and they have extensive expanded, and the level of mass education rose. These explanations for the difference” (Kindleberger, Aliber changes gave strong impulses to the development of 2005, 24). financial markets and the penetration of society by All these mechanisms can clearly be recognised in the financial industry. Four trends appear particularly the development of the current crisis. In so far, the relevant from this point of view: financial instability hypothesis has, without a doubt, 1. As already mentioned, the volume of private fi- proven its empirical validity. From this one could con- nancial assets showed a strong and continuous rise clude that the present crisis is nothing but a repeti- which by far surpassed the growth of national income. tion of the well-established historical pattern of finan- In West Germany, private financial assets increased cial crises described by Minsky and Kindleberger and, around twice as much as the net national income be- Aliber. However, such an interpretation would not be tween 1960 and 1990 (Stein 2004, 35); the same trend sufficient, as I am going to argue in this paper. What it continued, albeit slightly diminished, in united Ger- neglects is not only the unprecedented depth and the many between 1991 and 2004 (Deutsche Bundesbank global dimension of the crisis. Moreover, what should 2005, 28). In 2006, the gross volume of financial as- not be overlooked are certain long-term structural sets in Germany amounted to 4.5 trillion Euros (net changes of mature industrial societies which have led 2.9 trillion), around twice the gross national product, to an accumulation of tensions and imbalances on the and the wealth to be bequeathed has risen according- capital markets, thus enhancing the disruptive poten- ly (Szydlik 2004). Even in Germany, where the popu- tial of financial market bubbles – at least in compari- larity of holding stocks has always been low in inter- son with the era of the Bretton Woods arrangement national comparison, in a population of 82 million in from the end of the Second World War to 1973. Since 2006, 10.3 million owned stocks and funds (Institut the 1970s, the growth rate of global private financial der deutschen Wirtschaft 2007, 66). Although there assets had been around three times as high as that of is still a remarkable wealth gap between East- and the social product in 23 highly developed OECD-coun- West Germany, East German proprietors are gradually tries, and the trade volume on markets for foreign ex- catching up (Hauser 2009). With the rising value of change, stocks and loans grew five times as fast (Sas- financial assets, the stream of capital incomes (inter- sen 2005, 19 f.). As a consequence, a latent or open est payments, dividends) flowing to the owners in- mismatch has emerged between the growing volume creased steadily, the estimated annual volume of capi- 21 Christoph Deutschmann Journal of Social Science Education Paradoxes of social rise – The expansion of middle classes and the financial crisis Volume 9, Number 1, 2010, pp. 20–31

tal incomes amounting to at least 300 billion Euros class financial rentiers has meanwhile grown consid- in Germany before the crisis. According to the World erably. Likewise, the corresponding social interests Wealth Report published annually by Capgemini and seem to have become much more influential. Invest- Merrill Lynch, there were 3.1 million “High Net Worth ing money in stocks, private and public bonds has be- Individuals” (HNWIs = net ownership of financial as- come a mass phenomenon, as it becomes evident in sets of more than 1 million US Dollars) in Europe and the daily TV-news. The social profile of the investors 10.1 million in the world in 2007 with an aggregate is characterised by a preponderance of higher educa- capital of 40.7 trillion dollars; at the global level the tion and academic qualifications, a concentration on number of HNWIs doubled between 1997 and 2007 self-employed, professional, clerical and managerial (Lauterbach, Ströing 2009, 18). While there is a lively occupations, a relative dominance of the male sex, of public debate on the level of taxes, social security con- pensioners and higher age groups (Lebenslagen in tributions, wages, salaries and manager bonuses, the Deutschland 2005, Tarvenkorn, Lauterbach 2009). In legitimacy of effortless capital incomes seems to be some of these aspects, the profile is remarkably differ- beyond any discussion – in spite of the increasing cost ent between European countries (de Bondt 2005). We burden they create for the real economy. encounter a social milieu that is very diverse, stretch- 2. As it is well known, ownership of financial assets ing from gamblers and social climbers on the one hand, is distributed very unevenly, the bulk of capital falling to wealthy and saturated pensioners on the other. to the top 1 to 5 percent of the wealthiest; moreover, 3.) The increasing volume of financial assets and the concentration of financial wealth has increased number of investors induced a strong expansion of since the 1990s. Nevertheless, even the upper middle the market demand for financial services. As a result, classes (top three deciles of the income distribution) “institutional investors” (pension funds, hedge and were able to accumulate considerable fortunes, as ta- investment funds) emerged on the financial market, ble 1 for Germany shows. first in the USA, later in Europe and other parts of the world. The term “institutional investors” is mislead- Table 1: Distribution of Private Financial ing in so far, as these firms do not invest their capital Assets in Germany 1993-2003 in real production. Rather, their business is a purely Billions of € (v.H.) financial one and concentrates on the management of their customer’s assets. In contrast to commercial Deciles 1993 1998 2003 banks, they do not depend on the credit business, 1 -2.1 (-0.2) -3.9 (-0.3) -7.9 (- 0.6) but collect the capital of their customers and invest it in stocks, private and public bonds and other secu- 2 2.4 (0.2) 1.3 (0.1) 0.8 (0.1) rities. What remains to the normal customer is only 3 6.3 (0.6) 5.9 (0.5) 6.1 (0.5) the choice between alternative package offers, dif- 4 12.5 (1.2) 13.4 (1.2) 16.2 (1.2) fering along yield and risk. The volume of capital col- 5 23.9 (2.3) 27.3 (2.4) 34.9 (2.6) lected by the institutional investors around the world showed a spectacular increase since the 1990s; today 6 50.7 (4.8) 58.5 (5.1) 70.5 (5.3) it surpasses the volume of the GNP in some countries 7 105.7 (10.0) 112.1 (9.9) 123.6 (9.3) (OECD 2005). Institutional investors no longer confine 8 160.3 (15.1) 171.2 (15.1) 190.0 (14.2) their engagement to the stock markets, but have ex- 9 227.3 (21.4) 247.0 (21.7) 275.8 (20.7) tended their business to the acquisition of small and middle sized firms (“Private equity”) and to markets 10 474.7 (44.7) 504.3(44.4) 624.4 (46.8) for raw materials and foreign exchange. Source: 2. Armuts- und Reichtumsbericht der Bundesregierung 4.) The rise of the institutional investors would (Federal Report on Poverty and Wealth); Lebenslagen in Deutsch- have been unthinkable without the globalisation of land 2005. Note: The figures are based on the “Einkommens- und capital and financial markets after the collapse of the Verbrauchsstichprobe” of the Statistisches Bundesamt (Federal Of- Bretton Woods-System after 1973, and the subsequent fice of Statistics), which does not include very large incomes and deregulation and liberalisation of the markets, which fortunes. For this reason, they differ from the above mentioned had been promoted in Europe mainly by the treaty of figures of the “Deutsche Bundesbank”. Maastricht. A further decisive factor was the spread of modern information technologies and the “digitali- sation” of markets, which allowed a quantum leap in Even in the 19th century the middle classes – Kindle- the volume and speed of transactions, and provided berger and Aliber mention “spinsters, widows, retired the technical basis for the emergence of a new global naval and army officers, magistrates, retired mer- social space (Knorr-Cetina 2005). All this meant a spec- chants, parsons and orphanages” (Kindleberger, Aliber tacular enlargement of investment options for the 2005, 268) as the typical clientele – actively engaged financial industry. A global “market for corporate con- in financial speculation. However, the layer of middle trol” (Windolf 1994) emerged, and, moreover, markets 22 Christoph Deutschmann Journal of Social Science Education Paradoxes of social rise – The expansion of middle classes and the financial crisis Volume 9, Number 1, 2010, pp. 20–31

for derivates and other secondary financial products Its worth depends on the use one makes of it. Here, developed. On these markets, the funds could move I will try making use of the concept of sociological like fish in water, or, to be more precise, like pikes in explanation by applying it to the actual processes on a fish-pond: with the elimination of national capital the financial markets. market controls and the expansion of investment op- A sociological explanation consists, as I will de- tions, the opportunities for fraud and corruption like- scribe here only briefly, basically of three steps (Esser wise increased (Windolf 2005; Blomert 2005). 1993, 1999): First, a reconstruction of the social situa- tion of the actors (“logic of situation” according to III. Financial markets and shifts of social Esser); second, a theoretically based explanation of class structure: A macro-micro-model individual action in the given situation (“logic of se- The changes outlined above are meeting increasing- lection”); third, a deduction of the newly constituted ly critical comments in the public. Some observers collective situation from the aggregated effects of in- warn that the rising power of institutional investors, dividual actions (“logic of aggregation”). How could cooperating with an influential consulting industry, an analysis of the development on the financial mar- may undermine the institutions of political democ- kets, which follows these three steps, look like? What I racy. Catchwords like “economic terror” are circulat- can offer in the following can obviously only be a very ing in the media, the hedge funds are denounced as rough outline. The question I want to answer is: What “locusts”, and the financial crises have evoked “fears are the collective consequences if a large number of of falling” among the middle classes. Corrupt ana- individuals in a capitalist society succeed in moving lysts, fraudulent bankers and analysts are denounced socially upward, if they become wealthy and then by politicians and the media, and many of the crash invest their wealth in collective funds? Thus, in the victims go to court in order to claim their apparent first step we will have to deal with the social situation “right”, like in the Lehman case. of the investors, with their objective social condition There can be no doubt that fraud, deceitful prac- and their perception (“framing”) of that condition. In tices and corruption are widespread phenomena on the second step we will concentrate on the action pro- financial markets and that the existing regulatory cess itself and on the motives and aims of the actors: structures and mechanisms give much room for such why do they – for example – invest their money in practices. Nevertheless, I cannot deny a certain un- securities, instead of real estate, or expanding their easiness: do the investors, now claiming to be “vic- consumption? Finally, we will consider the question tims”, really deserve so much compassion? Without of the collective consequences: How will the structure the often naive quest of millions of small investors of capital markets change, if the number of rentiers for maximum profits the business of the investment in a given population and the volume of their assets funds, even their existence, would not have been pos- increase in absolute and relative terms? And what are sible. Without doubt, fund managers are no altruists, the collective consequences, if the investors delegate and the complaints about their greed are everything the management of their assets to investment funds? else but unjustified. However, who stimulated the competition between the funds, driving them into 1. Logic of the situation riskier and riskier operations? It seems that the “ter- Some aspects of the objective situation of the inves- ror” of the economy, so vividly complained about in tors have already been dealt with above, and I will certain middle class milieus, goes back to a consider- not discuss this point extensively. The large majority able degree to the well-developed financial instincts of the investors belong to the privileged and socially of the very middle class individuals themselves. In successful. They earn superior or top incomes, many other words, it is not far-fetched to assume that the are academically qualified and have higher adminis- often complained negative phenomena of financial trative, managerial, professional jobs, or are self-em- capitalism may be interpreted partly as the unintend- ployed. However, many of them did not come from ed collective result of individual investor action. Here privileged origins but had to make their way up by we meet a constellation that appears to be a case for their own. They succeeded in climbing to occupation- genuine sociological analysis, if we understand soci- al and social positions often far superior to those of ology as the inquiry of unintended collective conse- their parents. We should keep in mind that the social quences of individual action. Sociological explana- structure of Western Germany – albeit so far hardly tions can contribute to clarifying the situation by Eastern Germany – is characterised by a strong trend carefully distinguishing between collective structures, towards intergenerational upward mobility. Accord- their impact on individual actions and the aggregate ing to the figures of “Datenreport 2006” (Statistisches effects of individual actions. A sociological explana- Bundesamt 2006, 603), even in the period 1991-2000 tion according to the well-established concepts of one descent of Western German men in the occupa- Coleman, Lindenberg and Esser is not yet a theory, tional status hierarchy fell to 2.4 social rises; in the but rather a kind of instruction how to build theories. period 2001-2004, the corresponding figure declined 23 Christoph Deutschmann Journal of Social Science Education Paradoxes of social rise – The expansion of middle classes and the financial crisis Volume 9, Number 1, 2010, pp. 20–31

to 1.9. On the contrary, Western German women wealth, but to return it to society via his foundations showed a positive balance of intergenerational social (Nasaw 2006). A more realistic assumption is that the rises only since 1991 (1.3); the corresponding figure wealthy will invest their money in a way that supports mounting to 1.9 in 2000-2004. Without this positive their further social rise. Status oriented symbolic con- balance in intergenerational upward social mobility, it sumption can be interpreted as a case of such a career- would hardly be possible to explain the high growth related investment of money: by buying a Mercedes or of private financial assets which, as already men- a prestigious Swiss clock I can signalise and anticipate tioned above, is mainly a Western German phenom- my affiliation to higher social circles whom I am striv- enon, too. I am focussing here on intergenerational ing to without actually belonging to them yet. mobility, not on career mobility, where the situation However, our focus here is on the motives of invest- nowadays has become different (more on this below). ing money in securities and other financial assets. At Social rises are reflected in above average increases this point, the instructions of Esser and Coleman sug- of individual incomes. Social climbers receive an ad- gest the introduction of a nomological hypothesis to ditional income bonus which they tend to interpret as explain individual action. However, no such hypoth- a reward for their efforts. esis is within sight. Sociological research on consump- We have arrived at the perception of the situation tion has delivered an impressive variety of findings on by the actors, and here we face a phenomenon which individual lifestyles and their dependence on socio-bi- has been previously analysed by Georg Simmel (1989), ographic conditions, milieu affiliations and personal and more recently in psychological studies on the capital endowment. The issue of money and invest- use of money (for an overview, Haubl 2002). Money ment of money, however, continued to be largely ig- does not only “indicate” the social position of an in- nored. Like neoclassic economists, sociologists seem dividual, but constitutes it, as it embodies a universal to consider money as “insignificant”. The behaviour private property right on social wealth. Simmel uses of investors received more attention from the side the German word “Vermoegen” which is normally of psychology and behavioural finance (Fischer et al. translated as “asset” or “fortune”; the literal meaning, 1999). However, the focus here is on relatively narrow however, is “being able to”. The owner of money is issues like herd instincts or the choice between risky socially influential not due to his/her social reputa- and conservative styles of investment and, first and tion or ranking, but commands a private potential of foremost, it is not sociological but psychological. generalised power which apparently works in a direct One of the few recent sociological studies is the way without any intervention of society. The power research report of Birenheide, Legnaro, Fischer (2005) embodied in money tempts the owner to forget the which is based on qualitative interviews with 37 small difference between his/her – more or less limited – stockholders in 2002. The results of this study allow personal capacities and the potential of money. As a to formulate some more specific hypotheses. One of consequence, money can become the vehicle for an the findings of the authors was that the saving behav- egocentric self-aggrandisement of the owner, follow- iour of the interviewed did no longer conform to the ing the motto: what my money “can”, I can and I am. classic “deferred gratification pattern”. “Not saving as The owner experiences his assets as a natural enlarge- such has disappeared, but its primary significance for ment of his ego. This is the reason why he must feel future consumption does no longer hold. Instead, a si- attacked in his personal integrity if he is required to multaneous presence of credit based consumption on pay taxes, or if the stock market crashes. Social climb- the one hand, and speculatively oriented accumula- ers seem to have a strong affinity to such types of self- tion of financial resources on the other, are prevailing” enactment, as they tend to view their money as “hard (Birenheide et al. 2005, 31, translation C.D.). Financial earned by my own efforts”. investment and consumption are not considered to be alternatives, but complement one another. The 2. Logic of selection motives for financial investment are closely related to We now proceed to the second step: how will indi- societal processes of individualisation. The investors viduals act after becoming wealthy, what objectives view themselves as “responsible” actors, disciplined and criteria will they follow in their decisions? From just by their conformity to social values of individual a purely theoretical viewpoint, one could assume that autonomy and self-responsibility. On the one hand, some will simply feel saturated after having reached this may lead to excessive control illusions, as the in- a certain income level. They may donate surpluses vestors tend to view the performance of their stocks for charitable purposes, saving only an emergency as the immediate outcome of their personal compe- reserve for themselves and spending it later. However, tence. On the other hand, a kind of frenzy may occur, such a hypothesis does not appear very plausible, al- where the ego of the investor loses all contact with though it may apply to certain special cases: Andrew reality and experiences itself as almighty. The first Carnegie, for example, was extremely rich. Neverthe- impulse to enter the business is often exhortations less, he felt obliged not to consume or to bequeath his of friends or relatives not to “leave your money idle”, 24 Christoph Deutschmann Journal of Social Science Education Paradoxes of social rise – The expansion of middle classes and the financial crisis Volume 9, Number 1, 2010, pp. 20–31

or “secret tips” of trustworthy persons. Advertising Against such popular views, a simple truth should actions, such as the campaign for “Telecom-people be kept in mind: Financial assets are always based on stocks”, suggest undreamt-of prospects of profit, leav- contracts between debtors and creditors. The value of ing behind all chances of normal gainful occupation. assets always depends on the availability of debtors After having entered the game, moods like “greed” or being able and willing to borrow the capital and to “fever” emerge: “The result is a kind of “faustian pact” repay it with interest. Debts must be redeemed, the between an anomic self, determined to transgress all money must flow back, and this can, in the final in- boundaries, and a rational ego, which remembers the stance, be ensured only by work: either directly by the risks and calculates long-term horizons” (Birenheide work of the debtor who has to earn and repay the cred- at al. 2005, 96, translation C.D.). Even long after the it granted to him by a bank, or indirectly by employees, share prices started falling, the investor feels deter- whose work supports the profitability of the capital of mined to keep the shares (which he had decided to bet the entrepreneur and enables the latter likewise to re- on) for reasons of self-respect, often with the result of deem the credit which he may have taken, or keeps the big losses. The investor faces the problem that his/her price of the company stocks high. Thus, the financial calculating ego mixes with the object of his calcula- system is always – as indirectly as ever – coupled with tions – money – in a diffuse way. There seem to be the real economy, in spite of all speculative excesses. no more relevant social concerns for him/her except Entrepreneurs in a dynamic capitalist economy, who profit and the prospect of more profits. plan to realise a profit on their capital by selling their Just because of its character as a “general means” products, always depend on a level of demand higher – this having been already Simmel’s (1989) central in- than the one they created themselves before by their sight – money rises above its status as a means and own cost payments. Economic growth is possible only becomes and end in itself which determines individu- under the assumption of a permanent inflow of addi- al action in a voluntary or involuntary way. To clarify tional demand into the system which must come from how this transgression of boundaries is reflected in the outside and needs to be financed by the creation individual practice – whether in the forms of avarice, of credit in the banking system (Binswanger 1996). greed or frenzy – and which social and biographic fac- “Openness and optimism towards the future” – what tors are relevant to explain these diverse forms surely first appears as a mere ideological topic in the pub- needs further research. So far we can safely conclude lic rhetoric on economic growth points in fact to a that Coleman’s hypothesis of rational choice and util- strong imperative: private households and capitalist ity maximisation does not appear overly helpful in firms must be prepared to incur debts and to spend explaining individual investor action. more money than they receive in order to keep the capitalist growth machine running. Without continu- 3. Logic of aggregation ous incurrence of new debts and without the corre- We now approach the third step in the logic of socio- sponding future oriented habits of work and lifestyles, logical explanation: What are the macro-structural capitalist growth would be impossible and the system consequences for societies and capital markets, if would head into a permanent crisis. The inclination to large numbers of individuals succeed in moving so- incur debts will – as a rule – be high where the large cially upward and invest their newly acquired finan- majority of the population is still living under poor cial wealth in the capital market? The question can material conditions but aspires to move socially up- be divided into two sub-questions: first, the question ward and to become wealthy. An ideal capital market regarding the macro-structural consequences of social might be conceptualised as a social pyramid with few rise (3a.); second, the question of what will happen if rich proprietors at the top and a large, poor, juvenile, masses of individual investors delegate their invest- but at the same time, socially aspiring population ment decisions to new types of collective actors, the at the basis. The prospect of social rise and financial capital funds (3b). wealth motivates an extraordinary work performance 3a.) Individual investors are normally not concerned among those without property. The efforts of the about the problem of the collective preconditions and poor, in turn, ensure a high demand for capital and consequences of their own actions. Many believe that the profitability of capital owned by the rich. they have something like a “natural right” on a yield This game may work under several conditions of their assets. If losses occur instead of the expected which cannot be brought in line with each other eas- profits, everybody feels surprised and betrayed, and ily. One the one hand, the existence of marked social some go to court in order to pursue their claims. One inequality, of a class dichotomy between a small elite does not think much about where the profit actually of capital owners and a large propertyless majority comes from or relies upon the expertise of trustwor- is required. Without this dichotomy there would be thy advisors or friends. The profit seems to flow from no tension and without tension there would be no the portfolio like the current from the outlet. Money dynamics. On the other hand, the class dichotomy itself appears to “work” for the investor. should not be socially (i.e., ethnically or corporatively) 25 Christoph Deutschmann Journal of Social Science Education Paradoxes of social rise – The expansion of middle classes and the financial crisis Volume 9, Number 1, 2010, pp. 20–31

closed. The propertyless must see a sufficient chance Table 2 compares the occupational status of Western for themselves to get rewarded for their efforts, to German men in 2000 with that of their fathers. The individually move upward and to cross the class di- four upper layers of the occupational hierarchy made chotomy, although the objective chance for success up 21.1 percent of the father generation, it increased may be tiny and hardly higher than in a lottery. Third, to 51.2 percent in the generation of the sons. The bulk however, not too many people should be successful in of this increase fell on the higher and middle service rising socially. To render this clear, one has to simply occupations, whereas the layer of the professionals imagine the extreme case of all propertyless satisfy- grew more moderately. The layer of entrepreneurs ing their aspirations and moving to the top. The result even showed a decline. The share of manual workers would be a reversed pyramid structure consisting en- (high, medium and semi/unskilled) fell from 52.9 per- tirely of capital rentiers with no net debtors redeem- cent in the generation of fathers to 37.2 percent in the ing the claims. Of course, such a constellation – which generation of sons; a spectacular decrease can also be I propose to call the “Collective Buddenbrooks-Effect” observed in the lower service occupations. (according to the famous novel by Thomas Mann) – If we interpret these figures from the viewpoint of would be untenable, as it would mean the immediate capital markets, a first general statement can be made: annihilation of all financial assets. the wealthier middle and upper layers of society have If we now go back to the above mentioned figures grown considerably. The descendants of these layers on collective upward mobility in Western Germany in no longer have a stringent motive to move further up- order to consider the collective consequences of that ward. Many enjoy the additional income flowing from mobility, the finding is clear: although German soci- their capital and some may cultivate their hedonistic ety is still far from the final stage of the collective lifestyles. With the expansion of these well-situated Buddenbrooks-effect, it has nevertheless already cov- classes and the rise of their wealth, the volume of pri- ered a considerable distance toward that stage. The vate capital seeking profitable investment opportuni- collective consequence of large scale social rises is ties on the financial markets is likely to have grown a structural upward mobility of society. The middle as well. Conversely, the lower layers, being endowed and upper classes of society become larger, the lower with only little or no assets, have shrunk in relative classes smaller. Table 2 gives an overview over the and absolute terms. With them, the social reservoir for amount of intergenerational upward mobility in West- upward mobile, “entrepreneurially” oriented debtors ern German society during the last decades of the 20th has decreased. It is this shift alone, which may give century; only men (fathers and sons) are considered. rise to an imbalance on the capital markets. The pos- sibility of such an imbalance, however, is supported Table 2: Intergenerational Mobility in by two additional factors: mounting blockades of up- Western Germany (2000) ward career mobility and the ageing of the popula- Percentages of adult male working tion. population, N = 3.650 In order to focus on the first factor, further analysis of the shifts of social structure is needed. If a large Social status Fathers Sons number of individuals in a cohort succeed in moving 1. Entrepreneurs socially upward, what are the consequences for the fol- 0.8 0.4 (10 employees and more) lowing cohorts and generations? Do their chances im- prove or do they deteriorate? Recent research findings 2. Professionals 1.8 3.1 on social mobility and on the labour market conditions 3. Higher Service Occupations 10.1 22.2 of the young generation seem to confirm the second 4. Middle Service Occupations 8.4 25.5 hypothesis. In their international studies on the im- pact of globalisation on the life courses and employ- 5. Lower Service Occupations 14.5 3.0 ment chances of the young generation (“GLOBALIFE”- 6. Self Employed 6.9 7.5 study), Hans-Peter Blossfeld and his collaborators (less than 10 employees) concluded that young adults, and especially those 7. Farmers 4.6 3.1 with low qualifications and little social and financial resources, are the losers of the globalisation process. 8. Highly Skilled Manual Workers 4.6 3.1 Since the end of the 20th century, their labour market situation has deteriorated markedly. They are exposed 9. Skilled Manual Workers 30.9 18.6 to high insecurity and burdened by precarious and 10. Semi- and Unskilled flexible employment contracts without command- 17.4 15.5 Manual Workers ing resources to buffer the risks (Blossfeld et al. 2005, 2007). However, the phenomena observed by Blossfeld Source: Geißler (2006: 260), based on SOEP et al. may be attributed not only to the economic con- sequences of globalisation, but may also be explained 26 Christoph Deutschmann Journal of Social Science Education Paradoxes of social rise – The expansion of middle classes and the financial crisis Volume 9, Number 1, 2010, pp. 20–31

as an after-effect of structural upward mobility of for- international markets. The investors try to find the mer cohorts and generations. On the one hand, the debtors elsewhere. Until the crash in 2008, a large offspring of the social climbers are in a privileged po- part of the capital, nevertheless, flowed to the United sition. They grow up in a warmly stuffed nest and do States, due to the political reputation of the dollar as not need to fight for their rise and success. Economic an international reserve currency and a “safe haven”. and also – as it is well known – educational assets are This helped the United States to finance their double being passed on from one generation to another. This deficit of international trade and public expenditures, guarantees a wide margin for the descendants of the and created a big bubble which eventually burst. Ad- well-situated, leaving hardly a chance for the others mittedly, countries like China, Russia, India, Brazil to catch up. With so many qualified positions already and other emerging economies have become increas- blocked by the privileged, it has become difficult for ingly attractive for investors during the last years. Al- young men and women from the lower classes to en- though the demand for capital is still high in some of ter occupational careers and to find access to quali- these countries, the political risks are, too. The crisis fied positions on the labour market. In Germany, the has shown that the globalisation of financial markets chances of lowly qualified youths (migrants as well as did not really provide a solution for the problem of ethnic Germans) seem to have deteriorated to such a chronic excess liquidity of capital, but actually has degree that many of them seem to have completely exacerbated it. The structural changes I described – abandoned the hope for social rise (Neugebauer 2007). structural upward mobility of societies, over-propor- A vicious circle between the objective deterioration tional growth of financial assets – could be observed of social chances and individual resignation has devel- more or less in all developed industrial countries dur- oped, which is being discussed under the keyword “so- ing the last decades of the 20th century, and today in cial exclusion” (Kronauer 2002; Byrne 2005; Bude 2008; their beginnings also in China. Stichweh and Windolf 2009). Of course, in order to ex- The global character of the crisis indicates that plain these phenomena, further factors need to be tak- the excess liquidity of capital has indeed become a en into account, such as ethnic segregation, disorgani- global problem. The financial industry reacted to the sation of families, conservatism and social selectivity dilemma of lacking real investment opportunities by of the educational system. I do not intend to discuss inventing artificial ones, and by pressing these deriva- these issues in more detail, since my point here is only tive and speculative creations into the market. Howev- their relevance for the development of the capital and er, it is evident that this could not provide a solution financial markets. It is not only the relative decrease for the underlying problem and could not prevent the of the social reservoir of promising entrepreneurial final burst of the bubble. These are the contradictions debtors, which gives rise to imbalances on the capital which have led to the actual crisis. They cannot only market, as I have argued above. These imbalances are be observed today, but have already been accumulat- reinforced by mounting barriers for upward social mo- ing for a considerable time; the burst of the Dotcom- bility and the corresponding discouragement of the bubble in 2001 goes back to the same reasons. The advancement motive. Dotcom-crisis had triggered a period of feeble eco- The other reinforcing factor is the ageing of the nomic growth especially in Germany (between 2001 population. The motive for social advancement and and 2005) which resulted in chronically high unem- entrepreneurial success tends to be strong in the ju- ployment. The permanent net-outflow of capital had venile stages of the individual life cycle, and tends a depressive effect on the economy, leading to reduc- to weaken in the more mature phases. The habitual tions of employment and a down-up-redistribution of orientation to the future which, as noted above, is incomes. As a consequence of the strong decrease of such an important cultural precondition for capital- regular jobs in the German economy during the pe- ist growth, is the privilege of the young. With chroni- riod 2001-2005, the middle class did no longer grow cally low birth rates and the foreseeable ageing of the but shrunk, as many individuals became unemployed population, the economically active part of the popu- or had to accept a degradation of their terms of em- lation will diminish, as will the cultural orientation ployment (Grabka and Frick 2008). These problems to the future. At the same time, the layer of wealthy will become even more acute, if the US will no longer pensioners will increase. Demographic change, thus, take their former role as a global debtor and promoter is a further factor that reinforces the social preponder- of growth in the future. ance of capital rentiers over entrepreneurs. 3b. Contrary to the common economic rhetoric, fi- On this background, nobody should be surprised nancial capital has ceased to be “scarce” since a long that the mature industrial societies in Western Europe, time, as I have emphasised. With the mounting over- North America and Japan are increasingly faced with flow of capital, the claim of capital proprietors on a the problem of chronic excess liquidity on capital “yield” has actually lost its objective foundation. John markets. As profitable investment outlets are lacking Maynard Keynes noted this already seventy years ago in the domestic economy, the capital flows into the and came to the conclusion that a “euthanasia of the 27 Christoph Deutschmann Journal of Social Science Education Paradoxes of social rise – The expansion of middle classes and the financial crisis Volume 9, Number 1, 2010, pp. 20–31

rentier” (Keynes 1973, 376) would be desirable. As ev- tity. Even research and development departments are erybody knows, this did not happen. On the contrary, becoming “economised”, as research engineers are by entrusting their money to institutional investors required to comply with time and cost targets and and capital funds, the individual investors grew a new to design their projects in close conformity with the type of collective actors, who are committed to serve requirements of the market and of the manufacturing their customers, the rentiers (and, not least, the fund process, thereby losing the necessary minimum of managers themselves), and to promote their interests functional autonomy (Grewer et al. 2007). throughout society. However, if firms lose their capacity to innovate, The funds are influencing the political system in a while at the same time being required to distribute manifold, indirect and direct way. Due to the sheer even more dividends to the shareholders, this means volume of the assets controlled by them – as already that profits will have to be financed by cuts in em- noted, it comes close to or surpasses the national ployment, wages, taxes, or in the capital substance product in some countries – the funds create facts by of the firm. In this case, profits no longer come from their decisions that cannot be ignored by any govern- successfully marketed innovations, allowing the firm ment. The consequences are felt in the arenas of tax, and the economy to grow (Schumpeter’s “creative de- fiscal and monetary policies. By their exit threat, the struction”), but from redistributing a given revenue funds managed to trigger a downward race of nation- in favour of the shareholders. The production of prof- al governments in the field of taxes and social security its ceases to be a positive sum game, giving all stake- contributions, particularly in Europe and, after the holders of the firm the chance to gain. It turns into a enlargement of the EU, in the East. Corporate taxes zero-sum game in favour of the shareholders, the em- are showing a declining trend throughout the OECD- ployees, the state and the community being the los- countries during the last 20 years (Ganssmann 2004; ers. This is detrimental not only to economic growth, OECD 2005). Apart from these indirect effects, there but also to the capacity of the economy to subsidise are also many direct interventions of the funds in the the non-economic subsystems of society – the insti- political system, being put forward by an armada of tutions of science, education, health, art and culture consultants, lobbyists and professors, who often are – by taxes and transfer payments. As a consequence, under contract to the funds. These advisors pretend these institutions become “economised”, as they are to deliver allegedly absent “economic expertise” to forced either to close or to raise the funds they need the governments (Rügemer 2004). They do their best by themselves. If possible, they may be privatised to promote political decisions in favour of the funds, and transformed into an outlet for always drifting, such as the abolition of the tax on sales of corporate profit seeking capital. In so far, the “economisation” shares under the red-green government in Germany in of the institutions of education, science and health, 2002. And, of course, they promote never ending cam- which Schimank and Volkmann (2008) have analysed paigns in the public media on the economic necessity in their studies, can be interpreted as a result of the and inevitability of lowering taxes, cutting social ex- replacement of the entrepreneur by the rentier in the penditures, etc. economy. Contrary to the common rhetoric, financial Beyond the political system and the public sphere, market capitalism did not promote the entrepreneur- the influence of the funds is felt on the level of firms ial forces in society. Rather, the rentiers seem to have and management. Firms that are under control of erected a regime of domination over the entrepre- the funds have to meet the profit targets agreed neurs, paralysing the real growth of the economy, in- upon, otherwise they risk to be sold or closed. This flating speculative bubbles and turning firms, commu- is the main reason underlying the often cited “short- nities and states into victims of the financial industry. termism” of management strategies, resulting in a ne- glect of investments in innovative projects or in the IV. Concluding discussion substance of the firm which do not promise immedi- My conclusion is that we are facing a complex of high- ate profits. Profits are no longer defined as “residual ly self-contradictory actions, not only of the small income” according to conventional management text- elite of the extremely rich, but also of the large num- books. Rather, they are now taking on the character ber of middle class investors. The investors believe in of a new type of “contractual income” according to their “natural right” to gain. They commit themselves the objectives agreed upon between the management to the egocentric illusion of absolute wealth, while and the owners. Conversely, wages and salaries are they are, in fact, undermining the conditions for the no longer “contractual incomes”; individual and col- creation of real wealth by their actual practice and lective bargaining agreements are no longer consid- the collective consequences of this practice. Present ered to be binding. The employees receive what is left day financial market capitalism has uncoupled prop- after the owners have satisfied their claims. Capital erty rights and entrepreneurial responsibility to a market oriented governance aims at uncoupling profit historically unprecedented degree. Millions of middle from risk and transforming it into a calculable quan- class shareholders are expecting “yields” on their as- 28 Christoph Deutschmann Journal of Social Science Education Paradoxes of social rise – The expansion of middle classes and the financial crisis Volume 9, Number 1, 2010, pp. 20–31

sets, without wasting any thought on the question expenditures. They exchanged “bad”, defaulted pri- of where the required debtors could come from, and vate assets for “good” public bonds and thus tried to without taking any entrepreneurial risk by them- guarantee the profitability of private capital via tax selves. One prefers preaching the sermon of the entre- money. This came down to the attempt to slow down preneurial virtues to others, and one refuses to accept the air leak of the bubble by pumping new air into that there can be no profit where there is no entre- it. As an immediate result, the downward movement preneurial innovation and creative destruction. With indeed came to a halt, even more, share prices started excessively growing financial assets, correspondingly to rise again and the investment banks are still paying more hard working debtors would be required. How- high bonuses as if nothing had happened. It remains ever, such a scenario is far from any reality, although to be seen, however, how lasting the present stabilisa- the consulting industry is doing its best to propagate tion will be. Obviously, there is still a lot of air in the and popularise it. Real societies first have to ensure bubble, and the stabilisation may turn out to be only their reproduction and continuity, for example by the prelude of a new, even deeper crisis. As a conse- raising and educating children, by caring for the el- quence of exploding public debts, the governments derly and disabled, by maintaining the social and cul- themselves may become targeted by the financial tural infrastructure of society – activities which, even markets and become the focus of the next turmoil, as today, continue to be mostly unpaid or not profitable. the present Euro crisis indicates. Even if a considerable number of people may engage For developing a more sustainable strategy, it is in entrepreneurial careers, society cannot devote its recommended to go back to the earlier analyses of entire energy to the business of creative destruction Keynes and search for ways how to prevent the build- simply to comply with the claims of the shareholders. up of excessive financial assets from the outset by Today, we face an escalation of these basic contradic- means of political regulation and intervention. The tions. The problem of capitalism underlying the pres- creation of speculative “products” by the financial in- ent crisis lies in its own success. Capitalism has often dustry should be curbed, investment and credit busi- proved to be successful in mobilising individual entre- ness separated clearly from each other, the public sec- preneurial energies by the promise of social rise and tor ought to be strengthened and enlarged. In order wealth for everybody. However, should this promise to overcome the public debt problem, capital incomes ever be redeemed – what happens then? and financial market transactions should be taxed ad- What is to be done? The value of the aggregate as- equately and efficiently. In a global capitalist system, sets and, with them, of debts will have to be brought political interventions of such a kind need to be coor- down to a level that can be mastered by the existing dinated internationally and cannot work on a purely society, which does not consist only of top perform- national basis. If the rise of non-redeemable capital ers and Olympic athletes. Indeed, this necessary im- claims were counteracted from the beginning, the risk plosion of assets developed for some time, starting of subsequent bubbles and crashes could be reduced. with the collapse of international stock markets in au- Economic sociology can contribute to uncover the tumn 2008, and lasting until spring 2009. In order to paradox structures of action on financial markets, and counteract the collapse and to stabilise the markets, thus can help the actors to accept the inevitable and the governments intervened with voluminous par- to overcome their narrow focus on private financial cels of credit, credit guarantees, subsidies and public gain.

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